Monday, 13 February 2012

Natural Gas Europe - Turkey Set to Join Black Sea LNG Project?

Below is my latest article for Natural Gas Europe, on Black Sea LNG projects. Original here:

Azerbaijan has temporarily halted a deal to sell liquefied natural gas to Ukraine, apparently owing to sudden interest by Turkey. Although the suspension is likely to be resolved, it reveals some interesting points for Black Sea energy security.

The two countries were due to sign a deal on liquefied gas transport across the Black Sea at the World Economic Forum in Davos, after a preliminary agreement was made in September.

The initial quantity was set at 5bcm per year, but by the end of the year Ukraine had decided to triple this to 15bcm: a dedicated LNG terminal, costing $1 billion, was due to be constructed in Ukraine by the Spanish firm Socoin to process the shipments. The LNG shipments, intended to start by 2014, would have helped Kiev to escape its politically and commercially punishing dependence on Russian gas. The project seemed to be ready to launch, and was discussed by Presidents Ilham Aliev and Viktor Yanukoych as late as 26th January.

However, Azeri officials called it off at the last minute. A subsequent meeting between the two presidents was held at the end of January, after which Yanukoych said that “there are technical issues that need to be considered by specialists.” He said that trilateral negotiations involving Turkey are now underway. Although technical fine-tuning was cited by both Azerbaijani and Ukrainian officials, political explanations have also been given for the delay.

One is Ukraine’s export of weapons to Azerbaijan’s arch-rival Armenia: “If they want to buy gas from Azerbaijan, let them not sell arms to Armenia”, said one official. Ukraine has indeed sold some armaments to Armenia over the last few years, according to the UN - but the exports have been far less significant than its sales to Azerbaijan.

A more likely explanation is the role of Turkey. Head of the Vladislav Kaskiv, chief of the Ukrainian investment agency, claimed that Turkey is responsible. He said that as Turkey was a major partner for Azerbaijan in the energy sector, its opinion must be factored into Baku’s calculations.

It is hard to divine exactly what this means. Turkey and Azerbaijan may be working closely on energy issues but Baku is an independent actor. Ankara’s input has not been sought on previous Black Sea energy projects, like the Azerbaijan-Georgia-Romania Interconnector. Azerbaijan, and particularly its astute Energy Minister Natig Aliev, has been keen to explore LNG export options, which would provide it an alternative to overland pipeline routes and their political complications.

So the intervention of Turkey into what had been a bilateral arrangement between Azerbaijan and Ukraine is a little surprising. Ankara has held separate discussions with Kiev on supplying natural gas, although there have been no indications on how this would actually take place – or indeed where the gas would come from, given Turkey’s own reliance on energy imports.

So Turkey may now be trying to combine efforts with Azerbaijan, with Turkey’s state energy firms, BOTAS and TPAO, becoming shareholders in the LNG consortium. This would be a valuable commercial enterprise and would also give Turkey greater leverage over European energy security.

For Ukraine, getting a formal agreement – with or without the Turks – is vital. It will weaken Gazprom’s hand in the ongoing contract struggle, and demonstrate the role which unconventional gas can play in wresting Europe’s energy supply out of Russia’s grip. Although the LNG shipments will not be decisive compared to the supply of gas from Russia, they will provide enough of a cushion to protect Ukraine in the event that Russia decreases its supplies.

The signing of an agreement will be worth watching for. Not only will it demonstrate the impact which unconventional gas is increasingly having on European energy politics; it will also hint at a deepening alliance between Ukraine, Azerbaijan and Turkey. This triumvirate, fuelled by Azeri gas, might emerge as a serious counterweight to Russian energy dominance in the Black Sea and wider Europe.


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